78 | Page Annex 1 PARAMETER VALUES Valuing costs and benefits in common price units is a key step in Cost-Benefit Analysis. This Annex sets out the key official parameter values to be used in the appraisal of transport projects and programmes for which the Department of Transport, Tourism and Sport or its agencies are Sanctioning Authorities. The first section provides central Government parameters and key principles as set out by the Department of Public Expenditure and Reform, in particular through Section E of the Public Spending Code. The second section provides specific values for transport parameters which should be used in conjunction with guidance set out in the main Common Appraisal Framework document. CENTRAL PARAMETERS Table A.1: Overview of Central Government Parameters PRESENT VALUES AND DISCOUNT RATE There is significant evidence to show that people prefer to consume goods and services now, rather than in the future. In general, even after adjusting for inflation, people would prefer to have €1 now, rather than €1 in 60 years’ time. As the impacts included in CBA are presented in monetary terms, all monetised costs and benefits arising in the future need to be adjusted to take account of this phenomenon, known as ‘social time preference’. The technique used to perform this adjustment is known as ‘discounting’. A ‘discount rate’, which represents the extent to which people prefer current over future consumption, is applied to convert future costs and benefits in to their ‘present value’, the equivalent value of a cost or benefit in the future occurring today. The official discount rate of 5 per cent has been set by DPER in Section E of the PSC. This discount rate should be applied in all transport appraisals. SHADOW PRICE OF PUBLIC FUNDS It is sometimes argued that distortions exist in the market prices for resources used in projects, or for the outputs of projects. The implication is that some other price, usually called a “shadow” price (i.e. a price attributed to a good or factor on the basis that it is more appropriate that its market price) should be used. Taxation gives rise to economic distortions by altering incentives facing economic agents, leading to changes in their behaviour and reduced economic activity. For this reason, the shadow price of public funds is greater than one. Put another way, a €1 private benefit resulting from a €1 grant raised by Parameter Rate Discount Rate 5% Shadow Price of Public Funds 130% Shadow Price of Labour 80% - 100% Shadow Price of Carbon 2015 - €6.58/tCO 2
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Annex 1 PARAMETER VALUES
Valuing costs and benefits in common price units is a key step in Cost-Benefit Analysis. This Annex sets out the key official parameter values to be used in the appraisal of transport projects and programmes for which the Department of Transport, Tourism and Sport or its agencies are Sanctioning Authorities.
The first section provides central Government parameters and key principles as set out by the Department of Public Expenditure and Reform, in particular through Section E of the Public Spending Code. The second section provides specific values for transport parameters which should be used in conjunction with guidance set out in the main Common Appraisal Framework document.
CENTRAL PARAMETERS
Table A.1: Overview of Central Government Parameters
PRESENT VALUES AND DISCOUNT RATE There is significant evidence to show that people prefer to consume goods and services now, rather than in the future. In general, even after adjusting for inflation, people would prefer to have €1 now, rather than €1 in 60 years’ time. As the impacts included in CBA are presented in monetary terms, all monetised costs and benefits arising in the future need to be adjusted to take account of this phenomenon, known as ‘social time preference’. The technique used to perform this adjustment is known as ‘discounting’. A ‘discount rate’, which represents the extent to which people prefer current over future consumption, is applied to convert future costs and benefits in to their ‘present value’, the equivalent value of a cost or benefit in the future occurring today.
The official discount rate of 5 per cent has been set by DPER in Section E of the PSC. This discount rate should be applied in all transport appraisals.
SHADOW PRICE OF PUBLIC FUNDS It is sometimes argued that distortions exist in the market prices for resources used in projects, or for the outputs of projects. The implication is that some other price, usually called a “shadow” price (i.e. a price attributed to a good or factor on the basis that it is more appropriate that its market price) should be used. Taxation gives rise to economic distortions by altering incentives facing economic agents, leading to changes in their behaviour and reduced economic activity. For this reason, the shadow price of public funds is greater than one. Put another way, a €1 private benefit resulting from a €1 grant raised by
Parameter Rate
Discount Rate 5%
Shadow Price of Public Funds 130%
Shadow Price of Labour 80% - 100%
Shadow Price of Carbon 2015 - €6.58/tCO2
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extra taxation does not imply a neutral result for the economy. The distortionary costs imposed by the additional taxation must be taken into account.
Guidance on the Shadow Price of Public Funds has been published by DPER (Public Spending Code Section E). The value of the shadow price of public funds is set at 130% to take account of the distortionary effects of taxation. Relevant exchequer cash flow should be adjusted by a factor 1.3 accordingly. This new value updates previous central and sectoral guidance which specified values in the range 125% to 150%.
SHADOW PRICE OF LABOUR In line with the shadow price concept, one of the central concerns in appraisal is to adjust the distortions in markets to provide a better guide to a more effective allocation of scarce resources. For example, when there is high unemployment, it could be argued that people employed in a project would not otherwise be employed in a productive way, and that the market cost of employing them should be replaced by a lower shadow price.
Guidance on a Shadow Price of Labour has been published by DPER (Public Spending Code Section E). A range of 80-100% has been set for the shadow price of labour. Those involved in the preparation of economic appraisals in the transport sector should use 80% as the shadow price of labour. Sensitivity analysis must be conducted on the upper bound of the scale. This range of acceptable values is consistent with previous centrally-set rules. In addition, the shadow price of labour should be applied to the cost component of economic appraisals and not to the benefits.
SHADOW PRICE OF CARBON In 2007, the Cabinet Committee on Climate Change and Energy Security established an interdepartmental Working Group - under a Department of Finance chair and reporting to the Senior Officials Group on reflecting the cost of Carbon Emissions in Cost Benefit Analyses. The Group was mandated to prepare a detailed research paper on the appropriate means of treating environmental emissions, in particular carbon dioxide emissions, in future CBAs of major infrastructure projects and to make recommendations on a standardised approach(es) in this regard.
In 2008 the Interdepartmental Working Group reported its findings to Cabinet Committee on Climate Change and Energy Security. The outcomes of the work were incorporated into the Department of Finance’s CBA guidelines. In 2012, the Senior Official’s Group on Climate Change and the Green Economy approved the Terms of Reference for establishment of a new Interdepartmental Working Group – to be chaired by the Department of Public Expenditure and Reform and reporting to the Senior Official’s Group - to update the work previously undertaken. The group decided that the ETS price should be applied to the non-ETS sectors. Focusing on the prices to be applied for CO2 emissions, the Group has made the below findings and recommendations for the period 2014 to 2020. These recommendations are formally set out in Section E of the Public Spending Code.
The price of CO2 on the EU ETS system on the European Climate Exchange should be used as the cost of CO2, where possible.
The European Climate Exchange offers futures pricing on the EU ETS until December 2017. Table 2 below demonstrates the average of the futures prices in the period
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22nd January 2014 to 25th March 2014, along with the most recent auction clearing price available at the time of writing.
In the absence of futures pricing for 2018 and 2019, the Group recommends continued use of the December 2017 futures price as a shadow price for the 2018-2019 period i.e. €7.29/tCO2.
Table A.2: Price of Carbon for CBA (2015-2019)
Price (€/tCO2)
Market Spot Price - 25th March 2014 €5.80
Average Futures Price – December 2014 €6.32
Average Futures Price – December 2015 €6.58
Average Futures Price – December 2016 €6.92
Average Futures Price – December 2017 €7.29
Shadow price – 2018/2019 €7.29
For the period post-20201, the Group has made the below findings and recommendations which are also set out in Section E of the Public Spending Code.
Future market prices for the post-2020 period are not available.
The Impact Assessment which accompanied the recently proposed2EU 2030 Framework for Climate and Energy Policy provides a price projection for the ETS in the event of no further policy developments, the so-called Reference Scenario.
Bearing in mind the existence of a significant degree of uncertainty over what might be agreed in subsequent negotiations on the 2030 Framework and based on the best available information before the Group as of April 2014, the Group recommends that for the post-2020 period the EU 2030 Climate and Energy Reference Scenario values be used to represent the value of CO2 in CBA.
The price projection is reported in 5 year intervals until 2050 and is detailed below. All prices are denominated in €2010.
Table A.3: Price of Carbon for CBA (2020-2050)
EU Reference Scenario – Projected price3 Price (€/tCO2)
EU Reference Scenario (Projected price) - 2020 €10
EU Reference Scenario (Projected price) - 2025 €14
EU Reference Scenario (Projected price) - 2030 €35
EU Reference Scenario (Projected price) - 2035 €57
EU Reference Scenario (Projected price) - 2040 €78
EU Reference Scenario (Projected price) - 2045 €90
EU Reference Scenario (Projected price) - 2050 €100
1 For sensitivity purposes, Departments/Agencies could use (i) the values for carbon that are put forward in the Impact
assessment (2014) of the EU Framework for Climate and Energy Policies, and (ii) the projected values for carbon that emerge from the domestic low-carbon road-mapping and modelling process that is on-going. For more info please see section on Sensitivity Analysis. 2 January 2014
3 All prices are denominated in €2010.
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BASE YEAR AND CONSTANT PRICES
With all project appraisals, it is necessary to set a baseline year as a single historic point in time by reference to which all economic values are stated or converted back/forward to. This is because values in project appraisal are taken net of inflation, i.e. by reference to the price levels in a particular year. Inflation is the general increase in prices and incomes over time which reduces what a given amount of money can buy. When applying monetary values to impacts over a long appraisal period in CBA, it is very important to remove the effects of inflation. Failing to remove the effects of inflation would distort the results by placing too much weight on future impacts, where values would be higher simply because of inflation.
As such, values assessed should be in constant prices, so that the effects of inflation are removed and the base year used should be 2011, in line with official guidance.
Note that choice of a fixed year for setting reference price levels does not mean that other technical elements - such as engine technology, fuel, vehicle or modal mix, or tax levels - must also be set to the same year. These should be set by reference to the best information on the latest position (for the current year), or the most likely future position (for future years). The related economic values would then be converted back to the baseline year price levels.
When economic values are to be adjusted to a different year by reference to price inflation alone, then the Consumer Price Index or an appropriate sub-index should be used. Where prices levels can also be expected to vary over time by reference to output or income levels, then nominal GNP per capita is generally the favoured index, except in particular circumstances where GNP per person employed is more appropriate (in particular, see Section 2.1 on Value of Time).
APPRAISAL PERIOD
Infrastructure projects often have impacts over a long time period. Such projects often have significant up-front costs that must be compared against benefits that accrue over a longer period. In order to do so, CBA typically forecasts future costs and benefits over a long time horizon and discounts them to present value (PV) for comparison. In Ireland, the official transport-specific evaluation period of 30 years is applied. This time period should normally be used where the life of the asset is 30 years or more. For large projects with long preparation time horizons, the 30 year time period should begin from the year in which benefits accrue, with the appraisal also including the years when costs commence. A large capital project with a four year construction period should be appraised over a 34 year period (4+30). Appraisers should consult with the Economic, Financial and Evaluation Unit of the Department of Transport, Tourism and Sport on this if uncertain.
Some projects, for example, fleet renewal, may involve assets that have a limited life; have special circumstances, such as franchises; or be addressing a transport problem with a short time horizon, so that a shorter appraisal period is more appropriate. With regard to short-lived assets less than 30 years, the project should be evaluated over the life of the asset.
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GROWTH RATES
Forecasts of macroeconomic growth are often required for project evaluation purposes. A number of sources are available for different time periods.
The Department of Finance publishes short-term macro-economic projections regarding variables such as economic growth (generally covering the immediate three year period). These growth projections should be used for appraisal purposes for the time period for which they are available. These can be sourced from the annual Stability Programme Updates.
The Economic and Social Research Institute also publishes macro projections for time horizons that can be used for periods beyond the scope of official Department of Finance estimates.
For projections relating to longer term time horizons (e.g. beyond the horizon of official statistics), those carrying out appraisals can contact the Department of Public Expenditure and Reform Central Economic Evaluation Unit for assistance.
Source: 2014 – 2020 Department of Finance Spring Statement; 2020 – 2030 ESRI Medium Term Review (2013)
POPULATION
Section E of the Public Spending Code determines that the CSO M1F2 scenario should be used as the relevant set of population assumptions as projections for appraisal purposes. The net migration assumption, M1, assumes that net migration will be positive in 2016 and rise to plus 30,000 by 2021 and the fertility assumption assumes that the total fertility rate will decrease to 1.8 by 2026 and to remain constant thereafter.
For transport project appraisal, the CSO M2F2 scenario is desirable as it provides a regional breakdown. The population forecasts under this scenario are given in Table 5 and should be applied for now.
Source: CSO Population and Labour Force Projections (2013)
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Sensitivity Analysis
Sensitivity analysis is an important component in appraisal in order to understand the impact of assumptions on the cost-benefit analysis results. Population projections are crucial to demand analysis/ forecasts for most projects and should therefore be one of the elements that should be varied as part of sensitivity analysis.
A ‘no growth’ scenario should be among the demand assumptions tested during sensitivity analysis. The most recent Census results could be one way that ‘no growth’ is tested. Where local areas may be at risk from de-population or reduction – a ‘no growth’ scenario may be too optimistic and assumptions about population decline should also be tested for these areas. Other drivers of local demand should also be tested as part of general sensitivity analysis. This will vary by project and economic sector.
TRANSPORT PARAMETERS
VALUE OF TIME
Transportation projects frequently involve time savings as a benefit. Time savings generally account for a significant share of the benefits of major transport projects. There are different types of time savings i.e. work time and leisure time.
These values are to be applied when calculating the value of time per person for use in the economic appraisal of transport projects in Ireland. The value of travel time varies according to journey purpose. Different values are provided for in-work/business journeys, for leisure journeys and for commuting journeys.
It is recommended that growth in GNP per person employed is used to predict the growth in the value of time for in-work trips, since this will be the ratio which affects the earnings of the average ‘in-work’ trip-maker.
Table A.6: In-Work Value of Travel Time in Factor Costs and Market Prices, 2011
In-Work Value of Time €/hour
Factor cost
In-work Value of Time €/hour
Market Prices
€29.02 €34.33
Table A.7: Leisure Travel Time Values in Factor Costs and Market Prices, 2011
Leisure Value of Time €/hour Factor Costs
Leisure Value of Time €/hour Market Prices
€10.78 €12.75
Average hourly earnings for travellers are calculated at €26.95 for 2011
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Table A.8: Commuting Travel Time Values in Factor Costs and Market Prices, 2011
Table A.9: Forecasted Growth in GNP Per Person Employed
VEHICLE OPERATING COSTS
Use of the transport system gives rise to operating costs for the user. These costs include both fuel and non-fuel operating costs. Non-fuel costs comprise costs relating to oil, tyres, maintenance and depreciation.
Fuel Costs
Fuel consumption is estimated by taking a weighted average of the most recent Irish road vehicle fleet and applying fuel consumption factors by both vehicle and road type. These data, when multiplied by the fuel prices given in Table 10, provide the basis for calculating vehicle operating fuel costs.
Table A.10: Fuel Consumption Parameters in Litres Per 100 Km, 2013
Parameters
Vehicle Type Urban (litres/km) Rural (litres/km) Motorway (litres/km)
Petrol Car 8.361 6.438 6.803
Diesel Car 6.559 5.251 5.552
Petrol LGV 13.131 8.103 7.737
Diesel LGV 9.662 6.809 8.068
OGV 20.268 14.239 15.003
Buses 41.268 24.827 21.883
M & M/Cs 5.710 4.050 4.674
Commuting Value of Time €/hour
Factor Costs
Commuting Value of Time €/hour
Market Prices
€11.86 €14.03
Period % Growth
2010 - 2014 1.4
2015 – 2019 3.6
2020 - 2024 2.2
2025 – 2030+ 2.3
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Table A.11: Fuel Prices in Cents Per Litre, 2011
Parameters
Fuel Market Prices Factor Costs
Petrol 149.2 63.0
Diesel 142.9 70.0
Non-Fuel Costs
Non-fuel costs comprise costs relating to oil, tyres, maintenance, and depreciation. The cost functions set out below are based on those used in the UK transport appraisal guidance WebTAG and adjusted to Irish values.
Table A.12: Non Fuel Costs, 2011
Vehicle Category Parameter Values
a1 ct / km b1 ct / hr
Car
Work Petrol 6.265 171.493
Work Diesel 6.265 171.493
Work Electric 1.460 171.493
Non-Work Petrol 5.507 0
Non-Work Diesel 5.507 0
Non-Work Electric 1.657 0
LGV
Work 9.099 70.308
Non-Work 10.327 0.000
Average 9.099 52.298
OGV1 Work 10.020 393.702
OGV2 Work 19.491 758.888
PSV Work 45.458 1036.494
Future Profile of Vehicle Operating Costs
For future fuel costs, fuel efficiency changes are taken into account through forecasting the evolution of the Irish vehicle fleet and applying fuel consumption factors by vehicle and road type. These values are set out in Table 13 and should be used in predicting the improvement in fuel efficiency for the calculation of future vehicle operating costs. For the period after 2030, values are assumed to hold constant.
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Table A.13: Forecast Fuel Consumption Parameters in Litres per 100 Km
2020 2025 2030
Vehicle Type
Urban Rural Motorway U R M U R M
Petrol Car 6.447 5.278 5.824 5.775 4.606 5.152 5.546 4.377 4.923
For non-fuel costs, it is recommended to use the general Irish CPI for converting non-fuel-related vehicle costs between different price base years.
EMISSIONS
Vehicle emission factors are estimated from the default values contained within the COPERT 4 road transport emissions model and weighted to the Irish vehicle fleet. Tables 13 to 15 provide emission factors for the main road transport pollutants by each different combination of vehicle and road type. These data, when multiplied by the cost of emission values given in Table 16, provide the basis for calculating vehicle emission costs.
Table A.14: CO2 Emission Factors in Grams per Km, 2013
Table A.17: Values for Greenhouse and Non-Greenhouse Gas Emissions, 2011 Prices
Emissions Type
Emission Value (€ per tonne)
CO2
€13.22
PM All Areas €19,143
NOX
€5,851
VOC
€1,438
PM2.5
Urban €200,239
Suburban €48,779
Rural €16,985
Future Emission Values
For future emission costs, technological improvements are taken into account through forecasting the evolution of the Irish vehicle fleet towards meeting EU pollutant emission standards and using the COPERT 4 emission factors disaggregated by vehicle and road type. The values given in Tables 17 to 19 should be used in forecasting the changes in vehicle emissions. For the period after 2030, values are assumed to hold constant.
Table A.18: Forecast Co2 Emission Factors in Grams per Km
2020 2025 2030
Vehicle Type
U R M U R M U R M
Petrol Car 148.271 121.377 133.940 132.821 105.927 118.490 127.549 100.654 113.218
It is not proposed to estimate noise impacts at the preliminary appraisal stage of projects), or in respect of the appraisal of programmes. However, once detailed design including route choice analysis has been conducted it is possible to assess noise impacts. Much research is needed to arrive at definitive values for noise impacts. However, based on two surveys, a value of €30 per DB(A) per person per year is proposed (2011 prices). It is recommended that this value be applied to both road and rail noise impacts. Noise impacts below a certain level may not be significant and may not therefore carry an economic value. It is recommended that Lden50 be used as the threshold for appraisal. This means that only incremental noise impacts above this value should be assessed.
Transport Infrastructure Ireland has issued guidelines for the treatment of noise and vibration effects of road schemes. These guidelines present a methodology for estimating noise impacts and set a design goal of Lden60.
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COLLISIONS
The severity of collisions varies from damage to vehicles to fatal collisions. Most collisions have elements of police costs, damage to property and insurance and administration costs. Where there are casualties as a result of a collision there are costs associated with lost output, human costs and medical and ambulance costs.
Table A.21: Average Value of Prevention of Road Collisions by Severity and Element of Cost, € (2011 Prices & 2011 Values)
Table A.22: Collision Costs by Type of Collision, 2011
Table A.23: Vehicle Occupancy Rates by Flow Group and Time Modes
Weekday Weekend
Vehicle Type
Purpose 1 2 3 4 6 7 8 9
Car
Work 1.24 1.25 1.26 1.26 1.33 1.34 1.38 1.38
Commuting 1.21 1.22 1.23 1.23 1.2 1.23 1.22 1.22
Other non-work
1.64 1.65 1.66 1.68 1.7 1.83 1.85 1.85
LGV
Work 1.36 1.32 1.37 1.38 1.42 1.42 1.42 1.42
Commuting 1.4 1.41 1.4 1.4 1.95 1.95 1.95 1.95
Other non-work
1.47 1.45 1.49 1.48 2.05 2.05 2.05 2.05
OGV1
Work 1.09 1.09 1.09 1.09 1.09 1.09 1.09 1.09
Commuting 1.25 1.28 1.24 1.24 1.25 1.25 1.25 1.25
Other non-work
1.29 1.33 1.26 1.27 1.29 1.29 1.29 1.29
OGV2
Work 1.03 1.03 1.03 1.03 1.03 1.03 1.03 1.03
Commuting 1.11 1.14 1.11 1.08 1.11 1.11 1.11 1.11
Other non-work
1.13 1.12 1.11 1.16 1.13 1.13 1.13 1.13
PSV
Work 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35
Commuting 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
Other non-work
9.35 9.35 9.35 9.35 9.35 9.35 9.35 9.35
N.B. See Flow Group Description below
Flow Group Description
1
Weekday
Overnight off peak
2 Adjacent to peak
3 Peak Hour am
4 Peak Hour pm
6
Weekend
Overnight off peak
7 Off peak
8 Adjacent to peak
9 Peak Hour
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Future Collision Values
Collision values are dependent on income, therefore the change in accident values over the evaluation time horizon should follow the growth in real GNP per person employed – the same updating mechanism, as set out in the value of time approach.
ACTIVE TRAVEL
The below values should be applied when calculating the benefits of investments in active travel. The total active travel benefit or cost is arrived at by combining the benefits associated with reductions in relative risk and reductions in absenteeism. To ensure consistency in appraisal of transport projects these values are presented in 2011 prices. Appraisers should cross-reference the section on the Value of Time which refers to the perceived value of time for active travel.
The calculated reductions in relative risk of death and the number of new walkers and cyclists are used to calculate a figure for the potential number of lives saved based on average mortality rates. An average mortality rate of 0.0019 is used, the mean proportion of the population aged 15-64 who die each year. The number of potentially prevented deaths is then multiplied by the value of a prevented fatality used in accident analysis (see collision values) to give a monetary benefit.
It is also assumed that the benefit of using active modes accrues over a five year period, after which new cyclists or pedestrians achieve the full health benefit of their activities.
Real growth in GNP per person employed should be used to adjust the benefits of reduced absenteeism from increased amounts of active travel between one year and another.
Valuing Reductions in Relative Risk
Table A.24: Reduction in Relative Risk for Cyclists and Walkers In Ireland
Cyclists Walkers
Return Single Return Single
Average Active time per workday (mins) 44 22 36 18
Proportion of individuals 0.9 0.1 0.9 0.1
Average active time per workday (mins) 41.8 34.2
Reduction in relative risk 0.21 0.11
Valuing Absenteeism Impacts
Increasing physical activity increases productivity in the economy by reducing short-term sick leave. The median absenteeism rate for short terms sick leave is 4.6 days and 5.8 days for the private and public sector, respectively.
The number of employees in public sector employment is about 21% of total employment in Ireland, based on CSO employment tables. Calculating average sick leave taken in Ireland by
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weighting the relative proportions of private and public sector employment gives an overall estimate of 4.9 days per year.
A cycling or walking intervention of 30 minutes per day reduces absenteeism in a reduction in short-term sick leave by between 6% and 32% per annum (WHO 2003). The lower bound of 6% is to be applied in appraisals to estimate the reduction in absenteeism per employee per year.
Thus, a conservative estimate of the expected reduction in absenteeism as a result of an intervention delivers activity levels of 30 minutes per day is about 0.3 days per employee per year (= 4.9 * 0.06). As in the case of mortality, the research in this area is scarce but it is assumed that the full benefits accrue to all new users.
The monetary value of the total benefit is then the product of the total hours per year saved and value of work time per hour (€34.33). The values should then be calculated, with graduated benefits to 2015, and full benefits from 2016 on, including real growth in the value of work time per hour in line with forecast GNP per person employed, then summed and discounted to give a total benefit in 2011 present values.
